Wall Street stages huge comeback
Published: Thursday, January 24, 2008 at 6:01 a.m.
Last Modified: Wednesday, January 23, 2008 at 9:29 p.m.
NEW YORK - Wall Street pulled off a stunning comeback Wednesday, surging higher in late trading and wiping out what looked to be yet another massive decline. The Dow Jones industrials, down more than 323 points in earlier trading, ended the day with an advance of just under 300 points.
Such volatility has become a hallmark of Wall Street's performance in recent months amid the ongoing housing and credit crisis and growing fears of recession. And, after five straight days of pullbacks, a rebound was to be expected. But analysts saw some positive signs in the day's trading.
The Federal Reserve's decision Tuesday to lower its benchmark federal funds rate by 0.75 percentage point to 3.5 percent, while met with some skepticism, did give intrepid investors a reason to buy Wednesday.
"You might say this is a belated reaction to what the Fed did this week, compounded by hopes for the Fed to do more next week,'' said Peter Cardillo, chief market economist at Avalon Partners. Traders who bet on the Fed's target fed funds rate were pricing in on Wednesday a 100 percent chance of a 0.50 percentage-point cut by the central bank when it meets next Tuesday and Wednesday.
Rate cuts are designed to stimulate borrowing and, in turn, business activity and the overall economy. They also will eventually boost profit margins for banks and other lenders, which have been working to lower costs and raise cash levels through layoffs and stock sales after having lost billions of dollars to bad mortgages and mortgage-related investments. Those companies - including Citigroup Inc., Washington Mutual Inc. and Merrill Lynch - were the big winners Wednesday.
"The early leaders in a market recovery tend to be banks, REITs (real estate investment trusts) and homebuilders, as these are the groups that typically would benefit first from a turnaround. And those have been the market leaders this week,'' said Steve Goldman, chief market strategist at Weeden & Co. "What has happened is the Fed is flooding the system with liquidity and eventually we should see some traction in the economy. And stocks tend to respond first.''
Still, analysts were mindful that in the past months, Wall Street has been known to soar one day and succumb the next.
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